Tuesday, December 07, 2010

Global Economy In Another Super-Cycle

THE world economy is in a super-cycle. This is a period of historically high global growth, lasting a generation or more. There are many factors driving this, including rising trade, high rates of investment, rapid urbanisation and technological innovation. Super cycles are also characterised by the emergence of economies enjoying rapid growth, such as China, India and Indonesia now.

The world economy has twice enjoyed super-cycles before. The first, from 1870 to 1913, saw a significant pick-up in global growth, with the world growing on average each year by 2.7 per cent a full 1 per cent higher than previously seen. That cycle was led by the emergence of the US and saw increased trade and greater use of technologies from the industrial revolution.

The second super-cycle, from 1945 to the early 1970s, saw growth averaging 5 per cent and was characterised by the post-war reconstruction and catch-up across large parts of the globe. It saw the emergence both of a large middle class in the West and of exporting nations across Asia, led by Japan.

We may now be in another super-cycle, with aspects similar to those seen in the first two super-cycles. For people in Asia and across the emerging world the idea of strong growth may not sound unusual. But for many in the West, the thought of a super-cycle may sound strange, given the present problems confronting the world economy. Yet the reality is the world economy now is over US$62 trillion (RM195.3 trillion), about twice the size it was a decade ago, and it has already exceeded its pre-recession peak.

Over the last two years, its rebound has been driven by policy stimulus in the West and by stronger growth in the East. Indeed, emerging economies, which are one-third of the world economy, currently account for two-thirds of its growth. This trend looks set to continue. By 2030, the world economy could grow to US$308 trillion (RM960.75 trillion). Excluding inflation that would equate to US$129 trillion (RM406.35 trillion) in real terms, or in today’s prices, and to US$143 trillion (RM450.45 trillion) keeping prices constant but allowing for some emerging-market currency appreciation. The projections would imply a real growth rate of 3.5 per cent for the period between 2000, when the super-cycle started, and 2030, or 3.9 per cent from now to 2030. That would be a significant step-up compared with 2.8 per cent between 1973 and 2000.

What is remarkable is not only the likely scale of this expansion but the fact that these forecasts are based on projections for growth that some might even think are too cautious! For instance, China is expected to grow on average 6.9 per cent per annum over the period to 2030, and India by 9.3 per cent. By 2030, India may have become the world’s third largest economy. Moreover, Indonesia, currently the 28th largest economy may have moved to 5th largest in twenty years, having enjoyed nearly 7 per cent average growth over that period.

There are always risks that could impact global growth. The first super-cycle ended with the outbreak of the First World War, the second with the oil shocks of the early seventies. Hopefully, the world today is better placed to address such risks, thanks to the emergence of international decision making bodies and policy fora such as the G20.

It is important to stress that a super-cycle does not mean that growth will be continuously strong over the whole period. For the last three or four years we have been amongst the most pessimistic about US growth. I am still cautious. Despite the benefits of quantitative easing, the US economy will still struggle in the year-ahead, growing below trend. Likewise, Europe and Japan face a sluggish near-term outlook where growth will be modest.

All this makes it even more remarkable if Asia can drive more of its own growth. That is, after all, what the world needs. Next year, China sees the first year of its twelfth five-year plan. That should help growth. But, even allowing for this, the Chinese and other central banks across Asia will be tightening policy to cap inflation. In turn, this should allow growth to be more sustainable, but at rates either close to, or even below, those seen this year.

So, even in a super-cycle, there can be challenges for policymakers. Just as it is important to focus on near-term challenges, it is also vital to keep sight of longer-term opportunities. During the super-cycle, we believe that China can displace the US as the world’s largest economy by 2020, far sooner than many expect.

Whilst such forecasts give a scale of the outlook, it is the story behind what is happening that is as important.There is the scale of the economies that are growing. As emerging economies grow they will exert greater influence on the world economy.

Then there is the impact from the growth of new trade corridors. Close to 85 per cent of the world’s population are becoming increasingly inter-connected through trade, allowing an unprecedented number of people to contribute to the global economy. Cash and financial resources will be critical drivers of growth, given the need for investment, particularly in infrastructure.

Then there is what I call perspiration, with more people working and spending, and inspiration, with greater use of innovation and technology. The countries that will succeed will be those with the cash, the commodities and the creativity.

In recent years I have described what was happening as the New World Order, reflecting a shift in the balance of economic and financial power from the West to the East. While still valid, a super-cycle better reflects what is happening. It is still possible for the West to do well in this environment, particularly if economies there are creative yet it is Asia that appears to be the clear winner.

Dr Gerard Lyons is group head of global research and chief economist at Standard Chartered Bank

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